Indonesian Deal Market Cools

Indonesia’s deal boom is showing signs of fizzling, at least for foreign investors, with Rabobank’s sale of its Indonesian subsidiary the latest to stall.

The Dutch lender’s efforts to sell Rabobank International Indonesia, which is valued at as much as $400 million, have been stymied by a new Indonesian regulation that limits a foreign investor to a 40% initial stake in any domestic bank, people familiar with the matter said. Rabobank couldn’t be reached for comment.

Rabobank’s struggle to find a buyer reflects a more challenging environment in Indonesia. The country remains appealing. Its middle class is huge and growing, incomes are rising and the economy is expected to grow by more than 6% this year. But red tape and high asking prices are preventing deals from getting done.

“We’ve had a lot of deals we have been working on that are just kind of stuck,” said Keith Pogson, a partner in Ernst & Young’s Asian-Pacific financial services office. “They’re stuck for a number of reasons. No. 1 reason is price perception. There’s a willing buyer, there’s a willing seller, but there isn’t the right price.”

The rule that has made life difficult for Rabobank took effect in July after Singaporean bank DBS Group Holdings Ltd. made a bid in April last year to buy PT Bank Danamon, Indonesia’s sixth-largest bank by assets.

Bank Indonesia, the central bank, this year approved DBS taking a 40% initial stake in Bank Danamon, as well as additional future stakes on certain conditions. But the deal remains in limbo as DBS continues to seek full control from the outset.

DBS’s experience hasn’t gone unnoticed. Banks from Australia, the Middle East, Canada and Asia considered buying Rabobank’s unit. But the group of potential buyers shrank quickly because they thought they might not be able to obtain full control of the bank, one of the people with knowledge of the matter said.

“I think there’s a sense that until Bank Indonesia starts to approve or clearly reject these banking agreements in the pipeline, and the longer this goes on, the more wary people will be about crafting deals,” said James Ankers, Rothschild’s co-head of financial institutions for Asia.

Price is also an issue, Ankers said, adding that for investors able to take only a 40% initial stake, “there’s a feeling that if I’m not buying a majority, I shouldn’t be paying a control premium.”

The most prominent buyers in Southeast Asia’s financial sector have been Japanese banks, which have demonstrated a willingness to hold minority stakes. Japanese banks are sitting on piles of cash that they find more effective to deploy in faster-growing overseas markets. But even they have their limits.

Helge Weiner-Trapness, head of the financial institutions group in Asia for Barclays, said Japanese companies’ overseas acquisitions have been driven partly by an “arguably temporarily overvalued” yen. That, along with the need to find profit growth, helped Japanese banks justify “very high valuations” on deals, he said.

Earlier this year, for example Sumitomo Mitsui Financial Group Inc. agreed to pay more than $1.5 billion to acquire a 40% stake in Indonesian lender PT Bank Tabungan Pensiunan Nasional. Investment bankers say it was one of the highest prices—based on a price-to-book ratio of just under five times — that they have seen on a banking deal in the region.

“To other buyers, the prices the Japanese have been willing to pay are crazy,” Weiner-Trapness said, noting that these motivations are unique to the Japanese. “But I think we’re at the end of an era. Even the Japanese have been saying that it is getting too expensive for the last year or so.”

The upcoming 2014 election in Indonesia could also hit deal activity, bankers say, particularly because regulations could be in flux as the election plays out.

Then there is the recent decline in Indonesia’s stock market, which was up 20% for the year through mid-May. That helped private-equity firm CVC Capital Partners Ltd. partially sell out of its investment in Indonesian retailer Matahari Department Store on the public market at a price of around 27 times this year’s expected earnings.

The Indonesian market has tumbled since, which could take some shine off valuations in the country.

“If we look around the region, we would say for Indonesia, that in terms of deal flow activity, it’s hot,” Pogson said. “But it’s probably not the hottest market in terms of deal flow closure.”